(This essay was published in Hong Kong Economic Journal on 26 February 2014)


In recent weeks I have written on the rise of the welfare state and the fragmentation of political life in democratic industrialized nations over the past century from a political economy perspective. This analytic approach does not take into account the historical circumstances of the welfare state’s rise.


In Europe, the spread of democracy played an important role, although the welfare state is not confined to democracies. Historians have also accounted for the rise of the European welfare states as a product of the rise of industrial capitalism, which had the consequence of bringing two ideologies into direct competition in the nineteenth century – liberalism and socialism. Each provided a very different interpretation of economic relations in the modern world.


Liberalism emphasized individual liberty, defended the benefits of free trade, open competition, limited government, private property rights and a laissez faire ideology. Socialism emphasized inequality, promoted conflict between capitalist and working classes, criticized markets, fought to abolish private property rights and urged a collectivist ideology. Communism as an extreme form of revolutionary socialist ideology was embraced by Russia and China in the twentieth century.


Classical and Modern Liberalism


Conflict between these two ideologies led to an enormous amount of industrial strife in many European nations. The social welfare state began to emerge in response to the unending conflicts. Germany under Bismarck began to introduce social insurance programs in the 1880s to undercut the socialists, and the conservatives supported his efforts. The British Liberal Party began to introduce social welfare reforms outside the old Poor Law system in 1906-1914. In the process they abandoned nineteenth century classical liberalism and adopted a new modern liberalism for the twentieth century.


Classical liberalism viewed the main threat to liberty as coming from the force and coercion of the state. It emphasized that the primary role of government was to protect liberty. Modern liberalism viewed threats to individual liberty as arising from sources other than the state, such as the concentration of money, the amalgamation of power, or the destitution of the poor, the sick or the elderly. Modern liberalism was an ideology that promoted an active government as the best guardian of liberty through government aid.


America began to adopt modern liberal ideas only in the 1930s. The New Deal policies introduced by Franklin Delano Roosevelt from 1932 onwards marked a major turning point in the development of the social welfare state in the United States. Why did FDR adopt the New Deal? And what was it?


It is useful to place the New Deal in a global setting: the severity of the Great Depression presented an existential threat to classical liberalism and political democracy everywhere, both as an ideal and as a reality. In response to the same economic crisis that confronted the United States, Germany turned to National Socialism and Italy to Fascism, and the Soviet Union was already under communism. All these nations adopted national economic planning and an authoritarian state. During FDR’s first term, these alternate systems were on the verge of imposing themselves by force on many other countries.


Democracy Challenged


It was not at all clear that democracy would survive in America. George F. Kennan – the father of containment, architect of the Truman Doctrine, and a key figure in the emergence of the Cold War – privately came to believe that the United States should become an “authoritarian state.” Walter Lippmann, on a visit to FDR a month before his inauguration as president, advised him: “The situation is critical, Franklin. You may have no alternative but to assume dictatorial powers” (see Jonathan Alter 2007).


Even in public, all sorts of prominent people praised the undemocratic alternative political systems that were emerging in Europe, especially Italian Fascism. Nicholas Murray Butler – president of Columbia University, president of the Carnegie Endowment for International Peace and a recipient of the Nobel Peace Prize – told the Columbia freshman class that dictatorships were now producing a better class of leaders than democracies.


The threats to liberal democracy were proliferating in a way that was without precedent. The forces for liberalism were facing off against fascism and socialism on a grand scale. The world appeared to be polarizing into the far left and far right leaving the future of the liberal democracies in considerable doubt.


Congress and Saving Democracy


This was, after all, a world in which the economies in the liberal democracies were sunk in depression, the banks were tottering, and millions were starving and out of work. The fascist and communist systems appeared to offer an alternative solution for attaining full employment and economic prosperity based on centralized national planning rather than free competitive markets. It was not only a time of considerable fear about the future of political liberalism, but also economic liberalism.


In America, it may be an exaggeration to state that the country was on the verge of democratic collapse or succumbing to central economic planning, but the fears were sufficiently real to usher in the rise of not only the welfare state, but also a national security state. The New Deal was first and foremost about the creation of a powerful executive state in these two areas.


The Great Depression had swept Franklin Delano Roosevelt and the Democratic Party into power after twelve years of Republican rule. FDR took up new government-driven economic programs to revive the depressed economy. The National Recovery Administration (NRA), Civilian Conservation Corps (CCC), Tennessee Valley Authority (TVA) and numerous other New Deal agencies established by Congress granted the administration new forms of executive power in economic affairs.


These programs were challenged in the courts at the time as unconstitutional. The US constitution was framed largely as a statement of classical liberal ideas and had many safeguards to protect individual rights against government encroachment. But despite judicial setbacks, Congress continued to experiment, passing American democracy’s boldest legislation: the National Labor Relations Act of 1935. The NLRA, or the Wagner Act, created the legal conditions for large-scale unionization in the United States. Steps to impose a national minimum wage were also taken at this time.


In addition to announcing the New Deal programs and promising to lead a broken nation towards the dream of ending economic insecurity, FDR also built up a vast national security state that led the US into war against fascism. His successor Harry S Truman would sustain that apparatus, leading the Cold War to contain the Soviet Union. The American state that rose to global dominance between 1932 and 1952, therefore, has to be understood in terms of, first, the defense against fascism and communism, and second, the remaking of capitalism from classical liberalism to modern liberalism.


Histories of the New Deal often emphasize the role played by FDR, the new bureaucracy he helmed, the social movements that swept him into power and the foreign threats he faced. FDR is regarded as a great American president of the stature of Washington and Lincoln, who led a demoralized US nation to global dominance and preserved liberal democracies in the world.


But another important element in the history and political economy of the rise of big government in America was the role of political coalitions in Congress. These essentially determined how the welfare state rose in the United States and its characteristics. Recent historians have reexamined FDR’s record and turned their attention to the role of Congress during his presidency in growing the welfare state and the national security state (see, for example, Ira Katznelson 2013).


Political Bargain and the New Deal


The South played an essential role in the shaping of the New Deal. The South was of course Democratic because of the Civil War and Reconstruction. In the political bargain that ended Reconstruction, in 1877, the Republicans got the White House and the Democrats got the withdrawal of federal troops from the South, which meant that the civil and voting rights of African-Americans would no longer be enforced there. Even as late as 1938 fewer than 4% of African-Americans in the South were registered to vote.


The South was so profoundly grateful for this that it remained substantially loyal to the Democratic Party until the Democrats reversed their previous position and endorsed the civil rights legislation of the 1960s. Conversely, at the beginning of the New Deal, and for the same reasons, most black voters, who were necessarily outside the South, were still loyally voting Republican.


The populist, racist and deeply patriotic southern Democrats were partners with FDR in shaping twentieth century American liberalism. The vast majority of Congressional members at the time of the New Deal were Democrats, and the majority of Democrats who dominated the House Committees hailed from the racist South. They took the lead in the New Deal’s radical moment and supported FDR’s experiments in government economic programs and unionization.


FDR in turn accepted a Faustian bargain with the Southern Democrats and allowed them to put their illiberal stamp on the New Deal initiatives. The Southern economy depended on low-wage black labor. Southerners made sure that the economic programs and labor rights legislation excluded agricultural and domestic workers, who were predominantly black. The economic programs were also tailored so that the South became the major beneficiary of the New Deal’s economic programs.


The South also led the charge against German and Japanese fascist militarism, laying the groundwork for a successful American war effort in the years before Pearl Harbor. Southern Democrats were resistant to overtures from German fascists, who had hoped to sustain American neutrality by appealing to the country’s racism. Beyond a general culture of militant patriotism, Southern support for free trade, rooted in the region’s reliance on agricultural exports, was a major source of its anti-fascism.


National Security and Welfare State


It was thus the American advocates of white supremacy who spearheaded the repeal of neutrality legislation, the institution of the United States’ first peacetime draft and the launch of a massive program of industrial rearmament — all before the country at large was united behind FDR’s call for the final destruction of the Nazi tyranny. Another Faustian bargain would later be made between Stalin and Roosevelt against Hitler.


Southern patriotism, economic interests and racial attitudes continued to mold American capitalism and foreign policy during the early Cold War, as fears at home and abroad ushered in the notorious McCarthy witch-hunts for secret communists in America led by Senator Joseph McCarthy. The role of the state in economic affairs became more subdued and central economic planning was never really adopted. Still, the powerful and well-resourced organizations based on private and public partnerships that were created by government continued to steer economic activity. The legacy of FDR was that America on the whole became a much more regulated economy.


Under the watchful eye of Southern Democratic politicians, the second half of the twentieth century was marked by an unprecedented burst of foreign aid and military spending, the construction of a massive nuclear arsenal, and the purge of leftists from government agencies, unions and civil rights organizations. Anti-communism only justified the “crusading state” abroad — a state that resurrected Europe while embroiling itself in postcolonial conflict across the globe.


The New Deal’s ethical compromises are, thus, the sources of the inegalitarian and illiberal tendencies of the American state. The racist flaws finally erupted in the 1960s into a powerful, movement for equal rights for blacks. But it was no accident that a conservative Southern Democrat also sunk the nation deeper in its advance towards a social welfare and national security state. President Lyndon B Johnson took over the presidency after the assassination of President John Kennedy in 1963 and embraced two bold initiatives – the “War Against Poverty” and the escalation of the Vietnam War. Both adventures also plunged the nation into its first post-war economic crisis with the appearance of stagflation in the 1970s.


Modern American liberalism – born out of the Great Depression and two world wars – combines pluralist democracy with a regulated capitalist economy, a bloated welfare state resistant to reform, and a powerful national security state that defeated fascism and communism and from time to time continues its crusading role for the free world. The rise of the welfare state in Europe and America has been driven not only by the tragic logic of political economy we discussed in previous essays, but also by historical circumstances over the past century. The consequences, for example, the rising burden of public debt and growing share of single parent families among low-income households, will continue to affect the lives of people in the present century.





Jonathan Alter, The Defining Moment: FDR’s Hundred Days and the Triumph of Hope, Simon & Schuster, 2007


Ira Katznelson, Fear Itself: The New Deal and the Origins of Our Time, Liveright, 2013



Eleventh essay in the series on Rekindling Hong Kong’s Magic

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